New urea plants could get subsidised gas

In a bid to woo fresh investments into the urea sector, the government is considering the option of giving natural gas to new urea manufacturingplantsatadiscountedprice for a limited period and ask stateownedgasdistributorGAILIndia toguaranteelong-termavailability of the feedstock to them. The move is part of the proposed new ureainvestmentpolicy .

A previous policy , aimed at boosting investments in the sector broughtouttwoyearago,didnotal low new entrants to get gas at the government-administeredpriceof $ 1.79 per million British thermal unit (mmBtu), the lowest price for gas in the country until recently. This had dampened the enthusiasmof investorsintheureasector. "One of the options under consideration is to give subsidised gas for a limited time. If 80% of the cost of urea production is attributable to natural gas price, there should be certainty on the price as well as sufficient supplyof gasfornewinvestments tocomein,"saidagovernment official, who asked not to be named.

The move comes in the wake of governmentraisingtheadministered price to the level at which RILsellsitsK-GD6gas--$4.2. Also, Anil Ambani-promoted RNRL's efforts to get gas from the prolific K-G D6 field at a cheaper rate than the government-fixed price was blocked byaSupremeCourtorderthat said pricing and allocation of gas has to be as per government policy . But the view among some officials is that since the urea sector badly needsinvestments,itcouldget adifferentialpricefora"limitedperiod."

Another government official, who too did not wish to be identified, told FE that at the currentglobalpriceof urea,the feedstock price of $4.2 per mmBtu is viable, but that may notbethecaseif gaspricegoes up. In a gas-based urea plant, there would be a fixed cost of $150 and a variable cost of 21 times the cost of gas for makingatonneof thefertilizer." At the current (administered and KGD6) gas price of $4.2mmBtu, the total production cost works out to $276 a tonne of urea, when the product sells in global markets at $290 a tonne. That makes the $4.2aviablefeedstockpricefor urea. But if it goes up, the plant’s viability will be affected,”explainedtheofficial,emphasising the need for firm commitments on price and supplyof naturalgas.

Manufacturers who have not availed the previous urea investment policy of 2008 get gas at the APM price and gets a 12% post tax return on the commodity,w hich is under pricecontrol.Beneficiariesof the policy were to get a better price for urea but had to rely on non-APM gas. But the policy didnothelpmuchintheabsence of guaranteed availability of affordable gas.

Therehasbeennonewinvestments in the urea sector for more than a decade,making supplies fall short of demand by an estimated 1.9 crore tonne by the end of next year.

Now, under the proposed new policy, the government is alsolookingatprovidingsome incentives for building gas pipelines to new urea production facilities as gas is more efficient a feedstock than naphtha,saidtheofficial.

“There is no point in askingproducerstoshifttogasin, say three years,ift here are no pipelines,” the official said.

Source: Financial Express

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Estimating gas requirement

A urea plant's natural gas requirement is a function of both the quality (heating value) of the gas being supplied as well as the energy efficiency of the unit.

A standard cubic metre (scm) of gas generates anywhere from 8,000 to 10,000 Kcal of energy, while being higher at the landfall or onshore entry point and lower as it is transported along pipelines to distant areas.

The energy consumption for producing one tonne of urea is 5.5-6 million Kcal for gas-based plants, whereas it is higher for units operating on naphtha (7-7.5 million Kcal) and fuel oil (7.5-8 million Kcal).

Taking an average calorific value of 8,200 Kcal/scm and a specific energy consumption of 6.2 million Kcal for every tonne of urea, the gas requirement for one million tonnes of urea comes to 756.1 million metric scm or 2.3 million metric scm/day (mmscmd) over 330 working days.

For 30 million tonnes of urea, the total requirement, then, works out to about 70 mmscmd.

Source: Hindu Business Line

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Fertiliser cos seek more gas from Reliance's K-G fields

 Fertiliser companies are seeking an additional 25 million metric standard cubic metres/day (mmscmd) of natural gas supply from Reliance Industries Ltd's (RIL) Krishna-Godavari fields to cater to the feedstock needs of their existing as well as proposed new urea capacities.

Currently, there are 17 gas-based urea plants with an aggregate production capacity of over 180 lakh tonnes (lt).

Their estimated gas requirement of roughly 43.5 mmscmd is more or less met through supplies of 42.5 mmscmd, which includes 15.3 mmscmd allocation from RIL and the rest from ONGC, the Panna-Mukta-Tapti joint venture fields and other sources.

Naphtha to gas conversion

But apart from them, there are five units now running on naphtha (Zuari Industries' Goa, Mangalore Chemicals & Fertilisers, SPIC's Tuticorin, Madras Fertilisers' Manali and FACT's Kochi) and four on fuel oil (Gujarat Narmada Fertilisers' Bharuch and National Fertilisers' Panipat, Nangal and Bhatinda) that are planning to switch over to gas.

Requirement to rise

The gas requirement of the naphtha-based plants is assessed at 6.7 mmscmd, while working out to 6.2 mmscmd for the four fuel oil-based units.

If the gas needs of these plants (having an installed urea production capacity of 43.5 lt) are also to be met, the total requirement will go up to nearly 56.5 mmscmd.

New capacities

Over and above these are the requirements of new urea capacities proposed to be created.

The Indian Farmers Fertiliser Cooperative (Iffco) wants to put up a 10 lt-plus unit at Kalol, where it already operates a 5.5 lt facility. Rashtriya Chemicals & Fertilisers, Tata Chemicals, Indo-Gulf Fertilisers, Chambal Fertilisers & Chemicals and Krishak Bharat Cooperative are also planning similar ventures adjacent to their existing plants at Thal, Babrala, Jagdishpur, Gadepan and Hazira, respectively.

If the 12-14 mmscmd requirement of the proposed new projects are added, almost 70 mmscmd of gas would be needed to feed a total urea production capacity of 280-290 lt.

More allocation

While this may help considerably bring down the country's increased dependence on urea imports (see Table), it would, however, entail allocating another 25-27 mmscmd of gas, mainly from the RIL fields.

“Work on the new Kalol project is subject to our securing a firm gas allocation at a competitive price from the Government. Without this letter of comfort, the project cannot be bankable”, Iffco's Managing Director, Dr U.S. Awasthi, told Business Line.

Ambani dispute

Fertiliser industry officials note that the Supreme Court recent judgement pertaining to the Ambani brothers' dispute has upheld the Government's supremacy over allocation and pricing of gas even if produced by private parties.

Since the Government policy already accords the highest priority to fertilisers, this should now get reflected in additional gas allocations to the sector, they say.

The RIL fields are currently pumping over 60 mmscmd of gas, which is expected to eventually be ramped up to 120 mmscmd.

Source: Hindu Business Line

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Will the new nutrient-based subsidy help?

The new nutrient-based subsidy policy is finally effective from April 1, 2010. The subsidy will be admissible for the three macro nutrients — nitrogen (N) phosphorous (P) and potassium (K) — one secondary nutrient — sulphur (S) — and two micro nutrients — zinc and boron — on actual weight of the nutrient in the fertiliser. The scheme will be applicable on controlled fertilisers other than urea, but including diammonium phosphate (DAP), monoammonium phosphates (MAP), triple superphosphate (TSP), muriate of potash (MoP), ammonium sulphate, single superphosphate and 12 other complex fertilisers. 

The subsidy per-unit tonne has been notified for 13 fertilisers, and the announcement for the remaining five fertilisers will come later. The urea price will continue to be controlled although the price that had been kept unchanged since February 28, 2002, has been raised by 10% from Rs 4,830 to Rs 5,310 a tonne from this month. The heavy subsidy on urea led to its overusage and smuggling to neighbouring countries. 

The objective of shifting from product-based subsidy (PBS) to nutrient-based subsidy (NBS) regime was to restore soil health by addressing the nutrient imbalances of NPK and the lack of secondary and micro nutrients through use of fertilisers on specific soil-moisture conditions and crop needs. Also, price decontrol is supposed to incentivise innovation in fertiliser products. 

Even after decontrol, the government intends to keep the prices of the 18 fertilisers within 5-6% of the current control price level. The subsidy will be administered through the industry and is benchmarked to the current landed import prices of DAP at $500 a tonne, MoP at $370 a tonne, urea at $310 a tonne and sulphur at $190 a tonne at the current exchange rate of Rs 45.50 to a US dollar. 

Simple calculations show that the subsidy on the nutrient was calculated in a manner that the current landed import price of the fertiliser after adjusting the 10%subsidy is below the present control price of the fertiliser. However, the government expectation to keep the decontrolled price of the phosphorous and potassic fertilisers within 5% of the earlier control price will not be achieved if either the international prices of the fertiliser rise 10% from the current levels or the rupee depreciates more than 10% to the US dollar. 

In such an event, there will be no option but to increase budgetary support in the form of NBS. The NBS regime, like the earlier PBS regime, does not address the government’s fiscal concerns if the issue price of fertilisers to the farmers is to be maintained. 

The NBS regime, as notified, seems to be old wine in new bottle. It is administered, and not market determined, and, therefore, will fail to ensure nutrient use as per soil health and crop requirements. Cheap urea will continue to be overconsumed. Deficiencies of other nutrients such as calcium, magnesium, chlorine, copper, iron, manganese and molybdenum remain unaddressed. 

Take the related case of human health and the pharmaceutical industry, where against the objective of providing subsidy to address specific health concerns and nutrient requirements that may be specific to gender, age and occupation, the government fixes the price of some drugs by subsidising the industry. This leads to overuse of the subsidised drugs, ignoring the specific health concerns of a person or her particular nutrient needs. 

The analogous situation under the NBS regime in human drugs case would be to give salt-based fixed and pre-determined administered subsidy to select drugs, with the further announcement that prices of these drugs would have to be kept within 5-6% of the earlier control prices. Would it not lead to similar behaviour of consumer and industry and outcomes as in the earlier PBS regime? Can the agriculture sector draw lessons from the health sector? 

Neither the PBS regime nor the NBS regime has a correlation with the actual demand for fertilisers, i.e., the soil health or the nutritional need of the crops. Soil can be tested for deficiencies in macro, secondary or micro nutrients in thousands of soil laboratories across the country. 

After taking into account the specific nutritional requirements of the crops to be grown in such soil-moisture conditions, the optimum type and dose of the fertiliser may then be prescribed by the agriculture scientist. Ideally, the soil test should be the deciding factor for the right nutrient mix for a given soil-crop requirement, and government subsidy should not distort this choice. 

The farmer could avail the subsidy support in the form of a fertiliser coupon that could be allotted to him depending on factors including the size of his land holdings and the soil condition. The Economic Survey has recommended that such fertiliser coupons ought to be freely tradeable. At the current national gross cropped area of around 200 million hectares and the present budgetary support of Rs 50,000 crore, the fertiliser subsidy at a flat Rs 2,500 per crop per hectare seems feasible. 

Such support should be independent of the choice of fertiliser type: chemical, biological or organic. Direct power for farmers will truly revolutionise innovation in fertiliser products, help restore soil health, increase agricultural productivity and reduce fertiliser prices through increase in producers’ efficiencies and reduced demand.

Source: Economic Times

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Gas supply to fertilizer sector from RIL operated KG D-6 block helped Government to save Rs 3,100 crore during last one year

Fertilizer sector is a major consumer of natural gas in the country as it uses gas as feedstock in urea manufacturing. The major feedstocks presently used in the fertilizer plant are natural gas, naphtha and fuel oil / LSHS and cost of feedstock varies from 65% to 87% of production costs. Since natural gas is one of the most cost effective fuels for fertilizer plants, gas based fertilizer (urea) production accounts for more than 66% of the total fertilizer production. Naphtha and FO/LSHS based production accounts for the balance production.  

However, unavailability of domestically produced natural gas has long been plaguing the Indian fertilizer industry over the years and forcing fertilizer companies to buy costlier naphtha/RLNG resulting in higher urea production cost and subsequently spiraling fertilizer subsidy. 

Commencement of natural gas from RIL operated KG D-6 block has bring a big sigh of relief for urea manufacturers as well as the Government, as the urea manufacturing companies have collectively been allocated 15 mmscmd of natural gas. The present allocation has satisfied the present gas requirement of fertilizer sector and thus reducing the subsidy burden of the Government. 

During 2009-10, the fertilizer sector was supplied about 4360 mmscm or 12.24 mmscmd natural gas on an average from RIL’s KG D-6 block. Back-to-envelope calculation indicates that supply of 12.24 mmscmd of natural gas from KG D-6 block has helped produce 6.10 million tonnes of urea and, thus, saved the Government nearly Rs 3,100 crore.

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Fertiliser subsidy may go up despite price decontrol

The move to decontrol prices of all non-urea fertilisers with effect from April 1, as part of the changeover to a nutrient-based subsidy (NBS) regime, is supposed to help lessen the Centre's subsidy burden.

But if the new rates of subsidy applicable on different fertilisers from the coming fiscal are compared with their existing levels, a somewhat different picture emerges. In most products, the subsidy payable to fertiliser companies will actually go up.

Take di-ammonium phosphate (DAP), where manufacturers and importers are currently given a concession of Rs 10,245 a tonne in return for selling at a controlled maximum retail price (MRP) of Rs 9,350 a tonne.

In the event of decontrol, companies will technically enjoy the freedom to set their own MRPs. Notwithstanding that, the Centre has decided to enhance the subsidy they would receive on DAP sales by 59 per cent to Rs 16,268 a tonne.

Likewise, the subsidy on mono-ammonium phosphate (MAP) has been raised by a whopping 104 per cent and that on triple super phosphate (TSP) by 38.5 per cent. Earlier, there was no subsidy on ammonium sulphate (AS), whereas now it has been fixed at Rs 5,195 a tonne, benefiting Gujarat State Fertilisers & Chemicals and Fertilisers and Chemicals Travancore.

Additional subsidy

Moreover, companies would be entitled to an additional subsidy of Rs 300 a tonne if they fortify their fertilisers with boron and Rs 500 in case of zinc. The current regime does not extend any such sops on secondary and micro-nutrients.

The only major product whose subsidy has been slashed, by over Rs 4,700 a tonne, is muriate of potash (MOP). Under the NBS, the Centre has fixed a per kg subsidy of Rs 23.227 on nitrogen (N), Rs 26.276 on phosphorous (P), Rs 24.487 on potash (P) and Rs 1.784 on sulphur (S).

These, in turn, have been linked to the import parity prices of urea, DAP, MOP and sulphur, taken at $310, $500, $370 and $190 a tonne, respectively and at Rs 46-to-the-dollar.

The lower subsidy on MOP – and thereby the ‘K' component in complex fertilisers – is mainly due to Indian importers contracting material for 2010-11 at almost $100 a tonne below the rates negotiated for this fiscal. The accompanying table shows that the subsidy rates have been increased for even many complexes, excepting those not containing any ‘K'.

“The higher subsidies would make it very difficult for us to raise MRPs. In fact, we have been sounded out to keep any hikes to within Rs 30 a bag, i.e. Rs 600 a tonne,” an industry official told Business Line.

Source: Hindu Business Line

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Fertiliser sector awaits reform

The existing fertiliser pricing system is a fiscal burden on the government, apart from not benefiting the producers. Decontrol would encourage production and balanced nutrient use.

In its meeting held on February 18, 2010, the Union Cabinet took following three important decisions: To increase the maximum retail price (MRP) of urea by 10 per cent; decontrol prices of all other fertilisers; and move to a nutrient-based subsidy (NBS) regime.

The above policy decisions are being interpreted as an indication of the government's intention to liberalise the fertiliser sector, granting freedom to the manufacturers in pricing and making available to farmers a diverse basket of products to suit their soil and crop needs. How far is this true?

UREA PRICE INCREASE

The increase in MRP of urea from Rs 4,830 per tonne to Rs 5,310 per tonne, a meagre Rs 480 per tonne or Rs 24 per bag (one bag contains 50 kg), has come after a long gap of eight years (the price was last revised in 2002).

The Expenditure Reforms Commission (ERC), which laid down the blueprint for reforms in the fertiliser sector in 2000 (the government had then decided to implement its recommendations in toto), wanted urea price to be totally decontrolled by 2005-06. Five years later, we are nowhere near achieving this objective.

The government is yet to divulge its mind on what it proposes to do to with the convoluted New Pricing Scheme (NPS) — a new incarnation of the quarter-century-old retention price scheme (RPS) — that was launched in 2003 for making subsidy payments to urea manufacturers.

The NPS places manufacturing units into six categories, namely, pre-1992 gas; post-1992 gas; pre-1992 naphtha; post-1992 naphtha; fuel oil/LSHS based and plants based on mixed fuel. Though the scheme intends one retention price for each category, in reality, unit-specific prices are offered.

Had the government followed the ERC road-map, these categories would have disappeared way back in 2005-06. All producers would have in fact, been attuned to market-based prices.

MYTH OF DECONTROL

It is claimed that the producers of all fertilisers other than urea (there are 18 in all, mostly complex fertilisers containing N, P & K nutrients in varying proportions) will have the flexibility to fix their respective MRPs. This is a myth.

Till now, as in the case of urea, the MRPs of all these fertilisers are fixed by the government. For complex fertilisers, since last year, these are determined on the basis of the per unit nutrient price of N, P & K derived from MRP of urea, DAP & MOP, respectively.

Since these MRPs are way below reasonable cost of supply, the difference is reimbursed as subsidy to the producers. For DAP and MOP, the subsidy is calculated with reference to their respective import parity price (IPP).

Now, when the government says that manufacturers will have the freedom to fix MRP, it must be understood that it is not dispensing with subsidy. The latter will continue to receive subsidy; only the manner of determination will change under the proposed NBS.

How can the government grant subsidy (accounting for 50 per cent or even more of the producer's realisation) and yet not have a say in the MRP? The fact of the matter is that it will continue to control MRP as well.

In August 1992, based on the JPC (Joint Parliamentary Committee) recommendation, the government had de-controlled all ‘P' & ‘K' fertilisers. Producers were free to fix MRPs, but they were not to get subsidy.

Since cost of supply was substantially higher than what the farmers were paying before decontrol, in the absence of subsidy, producers had no option but to raise MRP. That led to a huge backlash, and in less than a month the government resurrected subsidy as an “ad-hoc concession”. It reintroduced control on MRP as well.

There is no reason to believe that circumstances have changed. The government has sought an assurance from the manufacturers that during kharif 2010, they would not increase MRP of the so called de-controlled fertilisers or keep the increase, if any, to the bare minimum — and the latter have no option but to follow the diktat.

Under NBS, the government is likely to determine subsidy on per tonne basis only on the ‘N', ‘P' and ‘K' content of any fertiliser. These would be benchmarked to the IPP of urea, DAP, MoP. NBS avoids detailed costing thus making system simpler and more transparent.

NUTRIENT-BASED SUBSIDY

NBS expected to come in force from April 1, 2010 (provided the inter-ministerial group is ready with the details by then). But it is unlikely to unleash the energies of manufacturers.

This is because the government has done little to address the basics. The biggest stumbling block under existing dispensation (for all fertilisers) is the inability — of even the best among all producers — to fully cover the reasonable cost of supplying fertilisers to the farmers.

When there is an increase in production cost (due to a steep increase in the cost of raw materials), the government does not permit the required adjustment in subsidy, due to fear of increase in fiscal deficit, and in MRP, due to fear of political backlash.

These imponderables will dominate during 2010-11 as well. The government is determined to lower fiscal deficit to 5.5 per cent and proposes to have a tight leash on fertiliser subsidy. Faced with opposition even from within UPA, it may not even permit increase in MRP.

WAY FORWARD

Direct payment of subsidy to farmers is not on the government's radar. This most crucial reform of the fertiliser sector is pending for close to a decade; it brooks no further delay.

The government should also remove pricing and distribution controls on all fertilisers including urea. This will attract investment in production capacity.

Continued imbalance in the NPK ratio is the outcome of excessive use of urea as a result of its low MRP vis-à-vis MRP of P & K fertilisers, all of which are controlled by the government. This can be corrected only in a market-based regime for retail prices.

The decontrolled regime will make a big dent on the ballooning subsidy bill. Besides, direct payment of subsidy to the farmer will encourage judicious use of fertilisers.

Source: Hindu Business Line
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More gas needed to revive sick fertilizer plants

Fertilizer secretary Atul Chaturvedi said in an interview that additional gas was needed for the expansion and conversion of so-called brownfield projects, which involve addition of capacity at existing units. He added that 15.4 million standard cu. m per day (mscmd) of gas was needed for seven sick units. Edited excerpts:

You said that the sector needs additional 43.4 mscmd of gas. Can you take us through what that is required for?

We have said earlier also that we need gas for our expansion projects, conversion and also brownfield projects which we are in the process of reviving and the starting point of all these initiatives is the availability of feedstock, that is gas. So we have some projects which have already been identified which are going through conversion from fuel oil and naptha to gas. We have got some already existing plants which are contemplating expansion for which they need commitment of gas and we have got about six-seven erstwhile Fertilizer Corp. of India Ltd and Hindustan Fertilizer Corp. Ltd plants which we are contemplating to revive in near future. One of the essentials is to have the commitment for gas and the total gas requirement according to our estimates is around say 40 mscmd for all these initiatives and we have to get it from somewhere because that is a precondition for financial closure.

Specifically for reviving the closed plants, how much additional gas is required?

As a ballpark figure, each plant needs about 2.2 mscmd of gas (15.4 for seven).

From where will this 40 mscmd come?

We are in discussions with GAIL and the petroleum ministry. We were earlier allotted gas for standard assets and now that part is over. Now, we need either a long-term commitment from GAIL, which ...can procure it from international markets, or from other sources, or we can get (it) if gas is available from (Reliance Industries Ltd) KG D6 (gas fields)...

With respect to the KG -D6, I believe you have also requested a transportation tariff plan or policy. What exactly is your difference with what the policy indicates right now?

It is not with reference to KG D6 transportation. What we need is a total clarity on the transportation tariffs because the way it has been explained to us, the cost of transportation of gas to eastern part of India, say in Bihar or West Bengal or Jharkhand or Orissa, would be extremely high. We now have to take a call whether it is cheaper to transport gas or cheaper to transport fertilizer. Since these are large consumption areas and they had earlier fertilizer plants, what we need is a clear predictable policy...earlier it was only GAIL, which was the single supplier, and now with more players joining in and more pipelines coming in the future, I think we need a...more predictable transportation policy...

source: livemint.com
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